How to Get the Best Deal on a Car Loan

Car loans are growing bigger and bigger. Total loan balances hit a record high $932 billion in the U.S. during the second quarter of 2015, according to Experian Automotive:

The average new-vehicle loan in the first quarter of 2015 was $28,711. That’s up from $27,612 last year.

The average used-vehicle loan was $18,213 — up from $17,927 last year.

These are large loans. Before you speed into this kind of debt, why not pause to learn how to lower your borrowing costs?

Here are six ways to get the best deal on a vehicle loan:

1. Get financing first, and then shop

You will save the most by paying cash.

If you cannot do that, explore financing options outside of dealerships and car lots. Get preapproved at the lowest possible interest rate. That could save you thousands of dollars.

Independent financing equals buying power.

2. Check your credit history and score

The interest rate you are offered depends a lot on your credit score, a ranking of creditworthiness based on the information in credit reports. So, pull your credit history to check for errors.

Uncorrected errors in a credit report could depress your credit score, costing you money in the form of higher interest on a loan. Check your report a few months before shopping so there is time to challenge and correct any mistakes.

Do not pay for a credit report. The source for a free report is AnnualCreditReport.com. You are allowed a free report from each of the three major credit bureaus every year.

Unlike credit reports, you are not guaranteed access to a free copy of your credit score. So, you may have to pay for it.

The most widely used credit score is the FICO score. It costs $19.95 to buy one score from myFICO. But, increasingly, credit card companies, banks and credit unions are offering them free to their customers through a FICO program called FICO Score Open Access.

3. Focus on APR

Loan rates typically are shown as annual percentage rate, or APR.

APR includes interest and fees, giving shoppers an apples-to-apples way to compare loans. A lower APR saves you money.

Use a loan calculator, like this one from Consumer Reports, to experiment with different loan amounts, interest rates and loan terms (the number of months you have to repay the loan).

4. Avoid long-term loans

Auto loans with longer terms are increasingly popular. In June, Experian Automotive reported that the average loan term hit record highs — 67 months for new vehicles and 62 months for used vehicles.

Meanwhile, loans with terms lasting 73 to 84 months made up a record-high 29.5 percent of all new vehicles financed.

Popularity doesn’t mean longer terms are a good idea, however. A longer loan has lower monthly payments, but you may pay much more in interest.

5. Compare rates and terms

A dealership may be able to offer you the best financing terms. But you should still do your homework beforehand by carefully shopping for the best loan offers so you have a comparison point.

Check online search tools and websites of banks for the best auto loan rates, and also find out what local banks and other financial institutions are offering.

Credit unions often offer the best rates. We have a credit union loan comparison service here.

6. Focus on total cost

To avoid getting burned, concentrate not on your monthly payment but on the total cost of the loan, including what you will spend on interest.

One way to bring down the total loan amount is to bring in a trade-in or hefty down payment.

Have you borrowed money to buy a car? What were your worst and best experiences? What are your tips? Share your story in our Forums. It’s a place where you can swap questions and answers on money-related matters, life hacks and ingenious ways to save.

Financial solutions for seniors:

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